Gol works toward domestic dominance in Brazil with WebJet buy

Brazil's Gol has upped the ante in the country's domestic market against rival TAM by attempting to acquire fellow low-cost carrier WebJet to bolster its position at the country's major airports, including the key battlegrounds of São Paulo Guarulhos and Santos Dumont in Rio de Janeiro.

Through its proposed reals (R) 311 million ($197 million) purchase price, Gol is executing its strategy, "to strengthen its domestic market position and increasing its share of Brazil's main airports, including Guarulhos airport" says Gol chief executive Constantino de Oliveira Júnior.

Using Friday frequencies as a base, Gol estimates a gain of 20 from WebJet at Guarulhos, increasing its total to 97 behind TAM's 104. Gol will though surpass TAM as the leading carrier in terms of available frequencies at Santos Dumont, and bolster its leading presence at Confins airport in Belo Horizonte, Brasilia, Salgado Filho in Porto Alegre and Galeão in Rio de Janeiro.

"We believe the acquisition is likely primarily motivated by access to slots at leading airports in Brazil, which are capacity constrained," say analysts at Raymond James. "This acquisition is expected to give Gol 84 additional slots at Brazil's main airports." They estimate Gol derives more revenue per slot than WebJet.

Founded in 2005, WebJet is among fast-growing Brazilian carriers Azul, Trip and Avianca-Brazil, which are slowly whittling down some of Gol and TAM's domestic dominance.

Between January and May this year Gol's domestic share fell from 41% to 37.5% year over year, while TAM's share remained relatively flat up to 43%.

Gol is also inheriting WebJet's fleet of 24 Boeing 737-300s, which are "older, fuel-inefficient and high-maintenance aircraft", warn Raymond James analysts.

As Gol starts phasing out the older aircraft as their leases expire from 2012 to 2014, and possibly exchanging some of the aircraft for Next Generation 737s prior to lease expirations, the analysts believe Gol's acquisition of WebJet is unlikely to contribute to its bottom line until 2013.

Even as Gol assumes R215 million of WebJet's debt, it believes roughly two years after the acquisition closes it will achieve R100 million in synergies - R60 million from aligning corporate functions and R40 million from operational efficiencies.

In their analysis of the deal the Raymond James analysts conclude Gol's load factors and yields should also improve through the WebJet purchase by the elimination of a price aggressive competitor, and as Gol eliminates overlapping flights.

Gol's chief stresses the carrier has no intention of reducing fares by acquiring WebJet, "just to be the leader in market share or something like that".

De Oliveira Júnior purposefully says he cannot predict when Brazilian competition regulators should approve the tie-up. Unlike other mergers, he believes Gol's acquisition of WebJet is less complex, and hopes to finalise the deal as soon as possible.

But shortly after Gol formalised its intentions for WebJet, local media reports emerged that regulators were considering suspending the deal, citing concerns over diminishing competition in the Brazilian aviation sector. Gol dismisses those reports, and stresses it has not received any formal notification from regulators regarding suspension of the deal.

"Gol and WebJet have only just signed a memorandum of understanding, which will be followed by the purchase agreement. As soon as the contract is signed, the documents will be submitted to the appropriate regulator for review," Gol explains. The carrier has ample experience with competition regulators after its purchase of Varig successor VRG was approved in 2008.

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